09KYIV1656, UKRAINE: NO EXPECTATIONS FOR A GAS PRICE INCREASE

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C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001656
SIPDIS
DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC
DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO
NSC PLEASE PASS TO KKVIEN
E.O. 12958: DECL: 09/28/2019
TAGS: EPETECONEFINENRGERELPGOVPRELPINRUA
SUBJECT: UKRAINE: NO EXPECTATIONS FOR A GAS PRICE INCREASE
REF: KYIV 1487
Classified By: Classified By: CDA James Pettit for reasons 1.4 (b,d).
¶1. (C) Summary. Despite apparent renewed pledges from Prime
Minister Tymoshenko to the IMF that a 20 percent gas price
increase for households would take place on October 15, the
message from our Ukrainian interlocutors is that a gas price
increase will not happen. Vitaliy Hayduk, head of
Tymoshenko's advisory group, told us that there will not be a
gas price increase, and the IMF should reverse its position
on the issue. The widely held belief in Kyiv, conveyed to us
by government, Naftohaz, and Party of Regions'
representatives, is that a gas price increase would be
"political suicide" ahead of the presidential election.
While it is possible that the GOU will go forward with an
October 1 increase for heat producing companies to
demonstrate its continuing commitment to the IMF program, a
price increase for households seems unlikely. End summary.
Gas Price Increase is Political Suicide. . .
--------------------------------------------- -
¶2. (C) Tymoshenko in July had committed to a 20% increase for
household gas prices on September 1 and a 20% increase for
gas prices for heat producing companies on October 1 as part
of the negotiations for the release of the third tranche of
the IMF's Stand-By Agreement and as a condition for a
EU/World Bank/EBRD financing package. However, the price
increase for households was ostensibly stopped by objections
from the Federation of Trade Unions (Ref).
¶3. (C) Advisors to Tymoshenko and Deputy Prime Minister
Nemyria separately told us that any gas price increase for
households would be "political suicide" only months ahead of
the presidential election. Vitaliy Hayduk, the leader of
Tymoshenko's group of advisors, stated that no gas price
increase would happen ahead of the elections. No prime
minister who was also running for president would increase
households' gas price four months before the election, not by
20%, not even by 5%, he said. Maria Nikitova, economic
advisor to Nemyria, echoed Hayduk's comments and said that
while the government was "engaged in active negotiations"
with the trade unions on the gas price increase, it would be
"political suicide" to raise prices. Naftohaz's Chairman
Oleh Dubyna told us that he understood that prices need to
increase but that the situation in Ukraine would only
deteriorate if Tymoshenko raised prices now.
And Would Not Solve Naftohaz's Financial Problems
--------------------------------------------- -----
¶4. (C) In addition to outlining the political impossibility
of raising gas prices, Hayduk and Dubyna also rejected the
idea that a gas price increase would improve Naftohaz's
financial situation. Dubyna told us that the planned rate
increase would only increase Naftohaz's revenues by $100
million this year. Hayduk stated that a price increase would
only create more problems for Naftohaz as collection rates
would drop if prices increased.
Trade Unions and Party of Regions Remain Against Price
Increase
--------------------------------------------- ---
¶5. (C) Chairman of the Verkhovna Rada's Social and Labor
Policy Committee and Head of the Federation of Trade Unions
(FTU) Vasiliy Khara told us that neither the Party of Regions
(his party) nor the FTU would support a gas price increase
for households. Khara said that the FTU had three concerns
about the proposed price increase. First, Naftohaz and its
subsidiaries produce 20 billion cubic meters (bcm) of gas
annually. By law this gas should be sold to households at
subsidized rates. Since households only consume 18 bcm of
gas per year, Khara concluded, there is no need to raise
household gas prices to reach the imported price of gas.
Second, Khara said he had examined Naftohaz's financial
records for the last two years and estimated that some UAH 8
billion is lost through misuse and corruption, including
illegal use of company funds, financing of non-Ukrainian
commercial structures, and phantom companies to which
Naftohaz makes payments. Khara concluded that a gas price
increase would only provide more revenues for Naftohaz to
KYIV 00001656 002 OF 003
steal. Third, Khara was concerned that the government had
not put forth adequate social protection measures to shield
the poorest from the price increase.
¶6. (C) Asked if the Tymoshenko government had reached out to
the Unions to convince them to support a price inc
rease
following the failure to raise prices on September 1, Khara
said that the FTU had not been approached by the GOU. He
stated that Tymoshenko realizes how unpopular a gas price
increase would be, and he speculated that she would not do it
before the election. Khara allowed the possibility that a
price increase might occur after the election, however.
¶7. (C) Party of Regions' Shadow Economic Minister Irina
Akimova told us that gas prices needed to be increased, as
the situation at Naftohaz is only worsening and dragging down
the Ukrainian economy as a whole. Naftohaz's debts would
negatively affect the GOU's overall debt burden, possibly
causing it to go over the Maastricht public debt ceiling of
60% of GDP, and would weaken the currency. (Note: Recent
estimates put Ukraine's public debt at around 32% of GDP by
the end of 2009. End note.) Akimova thought the government
would try to meet IMF criteria if it believed the IMF would
not back down but would not be willing to raise prices by the
full 20%. While Akimova stated she understood the need for a
price increase, she did not seem to be willing to support a
price increase publically.
October 1 Price Increase Might Go Forward
------------------------------------------
¶8. (C) While few in Kyiv believe gas prices will increase for
households before the election, some think the October 1
increase for heat and power producing companies will go
forward. Khara told us he thought the October 1 increase
will be enacted. Nikitova told us that the National Energy
Regulatory Commission (NERC) had already received approval
from the Ministry of Finance and the Ministry of Economy for
the October 1 price increase. If gas prices for these
companies do go up on October 1, it is doubtful that the
increase would generate much new revenue for Naftohaz.
Heating tariffs are set by municipal governments and are
based largely on political considerations rather than actual
costs of producing and transmitting heat. Heating companies
would see their costs go up but would not be able to pass
those costs to their customers. Debts to Naftohaz from
heating companies, already one of the largest segments of
Naftohaz debtors, would only increase.
IMF Should Reconsider
----------------------
¶9. (C) Hayduk and Dubyna both told us that the IMF should
reconsider its conditions and ease up on the requirement for
Ukraine to raise gas prices for households. Just before
ending our meeting, Dubyna came back to the gas price
question and asked us to pass along the message that raising
gas prices would only cause political problems. Nikitova
told us that the government hoped for the support of the
United States because the Cabinet of Ministers was doing all
it could on this issue. Hayduk noted that gas prices were
raised in 2008 when Ukraine's economy was growing and
commented that it was "stupid" for the IMF to demand that
prices increase in the midst of the economic crisis. He
stated that the IMF should revise its position and give the
fourth tranche of the SBA without conditions. He added that
Ukraine had not and would not suffer from a gas shut off by
Russia. It is Europe that suffers; Ukraine has gas in its
storage facilities.
¶10. (C) The only indications that Tymoshenko has pledged to
raise gas prices for households this year are her private
statements to IMF officials. Ukraine IMF Mission Director
Ceyla Pazarbasioglu stated in a September 15 briefing in
Washington that the GOU was preparing the needed documents
for the household price increase. Since then IMF officials
here in Kyiv have told us they believe the government will
raise prices on October 15. Nikitova may have indicated the
GOU's official line to the IMF when she told us that the PM
agreed to and is still committed to the price increase.
Since stating gas prices would not increase during a stop in
Western Ukraine on August 27, Tymoshenko has not talked about
gas prices in public. The European Commission's Delegation in
KYIV 00001656 003 OF 003
Kyiv has also been told in the last few days that it is
politically impossible to raise gas prices. EBRD's Country
Director Andre Kuusvek told us he was also pessimistic about
the chances of a gas price increase.
¶11. (C) Comment. Given the political sensitivity, it is
unlikely that PM Tymoshenko will raise gas prices for
consumers on October 15 (the traditional start date of the
heating season and only days before the start of the
presidential campaign) as the IMF expects. The GOU is
clearly pushing hard to see if the IMF will back off of its
conditions, possibly hoping an increase for heating companies
will suffice for the release of the fourth tranche. If the
IMF backs off and disburses the fourth tranche without
Ukraine fulfulling previous commitments, it will obviously
lose credibility and an opportunity to initiate reforms in
the energy sector. On the other hand, if the IMF does not
back off, it would hurt Tymoshenko in the presidential race
and thereby benefit Yanukovych. Any decision, therefore,
will have political consequences, intended or not. End
comment.
PETTIT

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